Question

Question 4

(a) How do you think economic growth and unemployment are usually related? Briefly explain (5pts).

(b) In the space below, draw simple supply and demand curves depicting a market for labor. Clearly label the axes and show the equilibrium wage rate and equilibrium quantity of labor (5pts).

(c) On the graph above, draw a dotted line which shows a wage rate that is well above the equilibrium wage rate (3pts).

(d) Label the quantity of labor demanded at this higher wage rate as Qd (4pts).

(e) Label the quantity of labor supplied at this higher wage rate as Qs (4pts).

(f) Which is larger, Qd or Qs? (5pts).

(g) Given the analysis you carried out above, what labor market condition would you expect to see if the wage rate were to get “stuck” above equilibrium wage rate? (5pts).

(h) Give an example of a government policy that might tend to lead to structural unemployment. (5pts)

Answer 1

4. a) The economic growth is negatively correlated with unemployment. That is when the economic grow th rise, the unemployment in the economy falls, and vice versa b) The labor market diagram is given below. The equilibrium occurs where demand equals supply, at E with wage w* and employment e* Wage Labor rate supply W1 w Labor demand e* Qd Qs Labor c) The wage level above the market equilibrium wage w* is w d) The quantity demanded is Qd e) The quantity supplied is Q' f From the figure above at the higher wage rate quantity supplied is higher than quantity demanded or Q'>Qd. g) Therefore, if the wage is stuck at higher than market clearing level, there will be structural unemployment in the economy. That is quantity supplied or people seeking job will be higher than people who get as job or quantity of labor demanded and hired h) Therefore, from the above analysis the one policy that can create structural unemployment is minimum wage law. The minimum wage law set the market wage at a level higher than market clearing rate w* and creates structural unemployment